Safestore Regulatory News (SAFE)

18 June 2019

Safestore Holdings plc

("Safestore", "the Company" or "the Group")

Interim results for the 6 months ended 30 April 2019

Solid H1 performance, on course to meet full year expectations

Highlights

Solid Financial Performance

· Group revenue up 5.6% (5.9 % at CER2)

· Group like-for-like8 revenue at CER2 up 5.9% with UK up 5.6% and Paris up 6.3%

· Adjusted Diluted EPRA EPS6 up 7.1% at 13.5p

· 7.8% increase in the interim dividend to 5.5p

· Statutory Profit before tax down to £38.2m from £81.9m in 2018 driven by reduced gain on investment properties of £7.9m (2018: gain of £51.8m)

Operational and Strategic Progress

· Continued balanced approach to revenue management drives returns

o Like-for-like8 closing occupancy of 74.3% (up 2.2ppts on 2018)

o Like-for-like8 average occupancy for the period up 3.9%

o Like-for-like8 average storage rate for the period up 1.9% in CER2

· Peterborough site acquired for new 42,000 sq ft store to be opened at the end of 2019

· Further new store openings scheduled in Paris Pontoise in Summer 2019, London Carshalton and Birmingham Merry Hill in the second half of 2019, and Paris Magenta, subject to planning, in the 2019/20 financial year

· Extension of Bedford and Barking stores in early 2020, adding 29,000 sq ft

Strong and Flexible Balance Sheet

· Group loan-to-value ratio ("LTV"9) at 31%, interest cover ratio ("ICR"10) at 8.7x

Frederic Vecchioli, Safestore's Chief Executive Officer, commented:

"Safestore's performance has been robust in the first half of the year and continues to build on the strong earnings and dividend growth achieved over the last five years. Since we recommenced our store acquisition and development programme in 2016, we have added 38 stores, including our new store pipeline of three sites in the UK in London Carshalton, Birmingham Merry Hill and Peterborough (subject to planning) and two sites in Paris at Pontoise and Magenta (subject to planning). Going forward, we expect to be able to continue to seize consolidation opportunities as well as new development sites that can be turned relatively quickly into new stores.

The self-storage market remains resilient to macroeconomic uncertainty and we continue to capture growing levels of demand in the UK and in Paris, with double digit new let growth on a like-for-like basis on both markets. As we enter our peak trading period we are well-placed to meet this demand with our 1.72m sq ft of currently unlet, fully invested space, and our pipeline of five stores that will add a further 252,000 sq ft.

Our scale continues to allow us to invest in our digital marketing platforms and service proposition, and this remains a key competitive advantage in a fragmented industry. Our balance sheet remains strong and efficient, with a low cost of debt. Our existing financing capacity, combined with the strong free cash generation of the business, allows us to continue to target selected development and acquisition opportunities. With our leading market positions across the UK and in Paris, the Company is in a strong position with significant low-cost growth potential. We remain on-course to meet the Board's full year expectations."

Notes

1 - Where reported amounts are presented either to the nearest £0.1m or to the nearest 10,000 sq ft, the effect of rounding may impact the reported percentage change.

2 - CER is Constant Exchange Rates (Euro denominated results for the current period have been retranslated at the exchange rate effective for the comparative period, in order to present the reported results on a more comparable basis).

3 - Underlying EBITDA is defined as operating profit before exceptional items, share-based payments, corporate transaction costs, change in fair value of derivatives, gain/loss on investment properties, contingent rent and depreciation. Underlying profit before tax is defined as underlying EBITDA less leasehold rent, depreciation charged on property, plant and equipment and net finance charges relating to bank loans and cash. Store EBITDA margin is defined as underlying EBITDA before administration costs as a proportion of revenue.

4 - Occupancy excludes offices but includes bulk tenancy. As at 30 April 2019, closing occupancy includes 14,000 sq ft of bulk tenancy (30 April 2018: 27,250 sq ft).

5 - MLA is Maximum Lettable Area. Group MLA at 30 April 2019 is 6.37m sq ft (30 April 2018: 6.29m sq ft).

6 - Adjusted Diluted EPRA EPS is based on the European Public Real Estate Association's definition of Earnings and is defined as profit or loss for the period after tax but excluding corporate transaction costs, change in fair value of derivatives, gain/loss on investment properties and the associated tax impacts. The Company then makes further adjustments for the impact of exceptional items, IFRS 2 share-based payment charges, exceptional tax items, and deferred tax charges. This adjusted earnings is divided by the diluted number of shares. The IFRS 2 cost is excluded as it is written back to distributable reserves and is a non-cash item (with the exception of the associated National Insurance element). Therefore neither the company's ability to distribute nor pay dividends are impacted (with the exception of the associated National Insurance element). The financial statements will disclose earnings both on a statutory, EPRA and Adjusted Diluted EPRA basis and will provide a full reconciliation of the differences in the financial year in which any LTIP awards may vest.

7 - Free cash flow is defined as cash flow before investing and financing activities but after leasehold rent payments.

8 - Like-for-like adjustments have been made to remove the 2018 openings of Mitcham, Paddington Marble Arch and Poissy and the closures of Leeds Central, Merton and Paddington.

9 - LTV ratio is Loan-to-Value ratio, which is defined as gross debt (excluding finance leases as a proportion of the valuation of investment properties and investment properties under construction (excluding finance leases).

10 - ICR is interest cover ratio. It is calculated in accordance with the requirements of our borrowings covenants, which is the ratio of underlying EBITDA after leasehold rent to underlying finance charges (excluding the amortisation of debt issue costs) on a rolling twelve-month basis.

Reconciliations between underlying metrics and statutory metrics can be found in the financial review and financial statements sections of this announcement.

Summary

Safestore has delivered a solid financial performance in the first half of the year, driven by organic growth. Reported Group revenue increased 5.9% at CER2 with like-for-like8 revenue growing at a similar rate. The Group's like-for-like closing occupancy increased by 2.2 percentage points ("ppts") to 74.3% with the average storage rate up 1.9% at CER2. Like-for-like Store EBITDA margin3, on a CER basis, grew by 0.4ppts to 65.3% (2018: 64.9%).

Our operational performance across the UK has been robust in the period resulting in a 5.6% increase in like-for-like revenue. Enquiry generation and store team conversion have been strong across all regions of the UK, resulting in like-for-like closing occupancy growing by 1.6ppts to 72.6% in the period. The UK like-for-like average rate grew by 2.6% in the period continuing its strong performance of the last four quarters.

In Paris, our trading performance has been strong with like-for-like revenue growing by 6.3%. This was driven by our average like-for-like occupancy performance which increased by 8.0% compared to the prior year. Like-for-like closing occupancy ended the period up 4.7ppts at 81.7% (2018: 77.0%). We are now in the twenty first consecutive year of revenue growth in Paris. Our new store at Poissy, which opened in the second half of 2018, is trading ahead of our business plan. Our like-for-like average storage rate in the period was down 0.8% although, excluding our recently opened lower price suburban Emerainville and Combs la Ville stores (opened in September 2016 and June 2017 and, therefore, defined as like-for-like), average rate was up 1.1% for the period.

Group underlying EBITDA of £41.4m increased 6.1% at CER2 on the prior year and 5.9% on a reported basis, reflecting the impact of the 0.8% weakening of the average Euro exchange rate compared to the prior period, on the profit earned on our Paris business. Rent costs benefited from favourable rent reviews in the period and, as a result, adjusted diluted EPRA EPS6 grew by 7.1% in the period to 13.5p (2018: 12.6p).

Our property portfolio valuation, before the impact of the 3.1% weakening in the Euro closing exchange rate, has increased by 1.6% since 31 October 2018. Overall, the portfolio is up £10.3m to £1,226.5m, the increase comprising a £14.5m revaluation gain and £5m of additions offset by a negative currency impact of £9.2m.

Reflecting the Group's good trading performance, the Board is pleased to recommend an 7.8% increase in the interim dividend to 5.5p per share (2018: 5.1p).

Outlook

Entering into Q3, we are continuing to progress our sales and generate year on year like-for-like new lets growth in what was a strong quarter last year. Safestore has a strong market presence in both the UK and Paris which continues to be strengthened by new store developments and acquisitions. Trading in the stores that we have opened since 2016 continues to be strong. Our recently opened stores in London Mitcham, Paddington Marble Arch and Paris Poissy have started well and are performing in line with or ahead of their business plans. We look forward to further openings, spread over the rest of the year, in Paris Pontoise, London Carshalton and Birmingham Merry Hill. In addition, subject to planning permission, we hope to open stores in central Paris at Boulevard Magenta in 2020 and in Peterborough in late 2019. With 1.72m sq ft of fully invested unlet space available at 30 April 2019 (the equivalent of c.40 stores) and a pipeline of 0.25m sq ft, we have significant but low-cost growth potential ahead.

As ever, our priority remains the ongoing improvement of the operational performance of the business and leveraging our leading market positions to full effect. We will continue our strategy of managing revenue growth, with our central pricing team leveraging our dynamic pricing systems to optimise tactical store level rate and occupancy decisions. Our strong and flexible balance sheet, healthy cash generation sufficient to fund the building of 2-4 new stores per annum, and proven management expertise, provides us with the opportunity to take advantage of further selective development and acquisition opportunities in our key markets, subject to our rigorous investment criteria.

Our business model remains highly resilient. Combined with our scale, geographical diversity, strong balance sheet and marketing expertise, we believe that we are well placed for continued future growth in what remains a young and expanding industry where consumer awareness is growing steadily. As we progress into our peak Q3 trading period, we are on course to meet the Board's full year expectations.

For further information, please contact:

A presentation for analysts will be held at 09:30am today at:

Instinctif Partners, 65 Gresham Street, London EC2V 7NQ

For dial-in details of the presentation please contact:

Guy Scarborough (guy.scarborough@instinctif.com or telephone on 020 7457 2020).

Notes to Editors

Our Strategy

The Group's strategy remains unchanged. We believe that the Group has a well-located asset base, management expertise, infrastructure, scale and balance sheet strength to exploit the healthy industry dynamics of the self-storage sector. As we look forward, we consider that the Group has the potential to significantly increase its earnings per share by:

· Optimising the trading performance of its existing portfolio;

· Maintaining a strong and flexible capital structure; and

· Taking advantage of selective portfolio management and expansion opportunities.

Optimisation of Existing Portfolio

Since 2016, Safestore has strengthened its market-leading portfolio in the UK and Paris with the Space Maker and Alligator acquisitions as well as the organic development of new sites. In total, 38 stores have been added including 24 existing stores, nine new developments and our current pipeline of five stores. We have a high quality, fully invested estate in both the UK and Paris. Of the Group's 146 stores, 94 are in London and the South East of England or in Paris with 52 in the other major UK cities. The Group now operates 44 stores within the M25, which represents a higher number of stores than any of our competitors.

In the last year, our MLA has increased by 1.3% to 6.37m sq ft at 30 April 2019. At the current occupancy level of 73.0%, we have 1.72m sq ft of unoccupied space, of which 1.44m sq ft is in our UK stores and 0.28m sq ft in Paris. This is the equivalent of c.40 stores located across the estate. The available space is fully invested and the related operating costs are essentially fixed and already included in the Group's cost base. Our continued focus will be on ensuring that we drive occupancy to utilise this capacity at carefully managed rates.

There are three elements that are critical to the optimisation of our existing portfolio:

· Enquiry generation through an effective and efficient marketing operation;

· Strong conversion of enquiries into new lets; and

· Disciplined central revenue management and cost control.

Digital Marketing Expertise

Awareness of self-storage is increasing each year but still remains relatively low with 52% (FY2018: 54%) of the UK population either knowing very little or nothing about self-storage (source: 2019 SSA Annual Report). In the UK around 75% of our new customers are using self-storage for the first time. It is largely a brand blind purchase with, typically, customers requiring storage starting their journey by conducting online research using generic keywords in their locality (e.g. "storage in Borehamwood", "self-storage near me").

We believe there is a clear benefit of scale in the generation of customer enquiries, specifically the ability to invest in, and optimise appearance in search engines for relevant user searches. In an increasingly competitive online environment, the ability to invest in technical advances to consumer websites and continually improve advertising targeting logic provides larger operators with a significant advantage over smaller rivals. The Group has continued to develop its leading digital marketing platform with increased efficiency delivering at Group level a 10.4% like-for-like new let growth at a reduced marketing costs in revenue percentage (4.8% of revenue in H1 2019 versus 5.5% in H1 2018).

Online enquiries represent over 82% (2018: 83%) of our enquiries in the UK, and over 74% in France (2018: 74%). Approximately 55% of our online enquiries in the UK now originate from smartphones, compared to just over 50% last year, highlighting the need for continual investment in improving customer experiences as behaviour and expectations evolve.

In 2019, Safestore achieved a Feefo customer service rating of 95% based on the customers who rated their experience as "Excellent" or "Good". Having achieved this service level online, in the store and on the phone, Safestore was again recognised with a "Gold Trusted Merchant" award - given to businesses achieving over 95% - for the sixth year running. In France, more than 93% of customers are satisfied with their customer service experience, rating it 4 stars and above.

High quality training and coaching drives store teams' motivation and performance

Our enthusiastic, well-trained and customer-centric sales team remains a key differentiator and a strength of our business. Understanding the needs of our customers and using this knowledge to develop in-store trusted advisers is a fundamental part of driving revenue growth and market share.

Safestore has been an "Investors in People" (IIP) organisation since 2003 and our aim is to be an employer of choice in our sector, as we passionately believe that our continued success is dependent on our highly motivated and well trained colleagues. In April 2018, Safestore was awarded the Gold accreditation under the IIP programme, a significant improvement from the Bronze accreditation awarded in 2015. This puts Safestore as one of the top employers of 14,000 IIP accredited companies. In addition, Safestore was subsequently shortlisted as a finalist for the IIP Gold Employer of the year 250+ category, putting us in the top ten of all companies that have achieved Gold accreditation. Investors in People enables organisations to benchmark against the best in the business on an international scale. We are proud to have our colleagues recognised to such a high standard not only in our industry but across 14,000 organisations in 75 countries.

We are committed to growing and rewarding our people and tailor our development, reward and recognition programs to this end. Our IIP recognised coaching program, launched in 2018, was upgraded in 2019 to reflect the increase in the calibre and performance of our teams and was well received by our colleagues in January of 2019. Our internal sales training framework also received its 2019 enhancements to reflect the elevated performance of 2018 and target our high expectations of 2019. The program was rolled out in May in preparation for the third and fourth quarters' selling seasons.

The training and development of our store and customer facing colleagues is an essential part of our daily routines. In 2018, we delivered a further 29,000 hours of training through face-to-face sessions and via our internally developed online learning tool. In 2019, we continue to build on this commitment. This Learning Management System also provides the opportunity for team members to receive rigorously enforced health and safety, fire and compliance training, ensuring that our staff are up-to-date in relation to their technical knowledge and continue to operate a safe environment for both our colleagues and customers. These tools, systems and resources have allowed us to effectively communicate changes quickly and manage compliance robustly.

All new recruits to the business benefit from enhanced induction and training tools which have been developed in-house and enable us to quickly identify high potential individuals and increase their speed to competency. They receive individual performance targets within four weeks of joining the business and are placed on the 'pay-for-skills' programme which allows accelerated basic pay increases dependent on success in demonstrating specific and defined skills. The key target of our programme remains that close to 100% of our store manager appointments are from within the business via our Store Manager Development programme, and we are pleased with our progress to date.

November 2016 saw the launch of our internal Store Manager Development programme designed to provide the business with its future store managers. Our most recent programme delegates have the opportunity to gain a nationally recognised qualification from ILM (Institute of Leadership & Management) at Level 3 with candidates due to graduate this year.

Our performance dashboard allows our store and field teams to focus on the key operating metrics of the business providing an appropriate level of management information to enable swift decision making. Reporting performance down to individual employee level enhances our competitive approach to team and individual performance. We continue to reward our people for their performances with bonuses of up to 50% of basic salary based on their achievements against individual new lets, occupancy, ancillary sales and pricing targets. In addition, a Values and Behaviours framework is overlaid on individuals' KPI performance in order to assess team members' performance and development needs on a quarterly basis.

February 2019 saw the launch of our "Make The Difference Forum" when 15 of our colleagues were voted to be the "people champions" and attend our peoples forum. This new initiative allows our champions to be the representative voice for each of the 12 Regions and Head Office in order to influence change and drive improvement for 'Our Business, Our Customers and Our Colleagues'.

People Champions will:

· Consult and collect the views and suggestions of all colleagues that they represent;

· Engage in the bi-annual 'Make the difference' forum, raising and representing the views of their colleagues;

· Consult with and discuss feedback with management and the leadership team at Safestore.

Our Values and behaviours framework concentrates our culture on our Customers. Customers continue to be at the heart of everything we do, whether it be in store, online or in their communities. Our Gold standard Feefo customer service score along with our "Excellent" Trustpilot rating reflects our ongoing commitment to their satisfaction.

In what is still a relatively immature and poorly understood product, customer service and selling skills at the point of sale remain essential in earning the trust of the customer and in driving the appropriate balance of volumes and unit price in order to optimise revenue growth in each store.

Central Revenue Management and Cost Control

We continue to pursue a balanced approach to revenue management. We aim to optimise revenue by improving the utilisation of the available space in our portfolio at carefully managed rates. Our central pricing team is responsible for the management of our dynamic pricing policy, the implementation of promotional offers and the identification of additional ancillary revenue opportunities. Whilst price lists are managed centrally and are adjusted on a real time basis, the store sales teams have the ability to offer a Lowest Price Guarantee in the event that a local competitor is offering a lower price. The reduction in the level of discount offered over the last five years is linked to store team variable incentives and is monitored closely by the central pricing team.

Average rates are predominantly influenced by:

· The store location and catchment area;

· The volume of enquiries generated online;

· The store team skills at converting these enquiries into new lets at the expected price; and

· The very granular pricing policy and the confidence provided by analytical capabilities and systems that smaller players might lack.

We believe that Safestore has a very strong proposition in each of these areas.

Costs are managed centrally with a lean structure maintained at the Head Office. Enhancements to cost control are continually considered and the cost base is challenged on an ongoing basis.

Strong and Flexible Capital Structure

Since 2014 we have refinanced the business on three occasions, each time on improved terms, and believe we now have a capital structure that is appropriate for our business and which provides us with the flexibility to take advantage of carefully evaluated development and acquisition opportunities.

At 30 April 2019, based on the current level of borrowings and interest swap rates, the Group's weighted average cost of debt is 2.25% and 83% of our debt facilities are at fixed rate or hedged. The weighted average maturity of the Group's drawn debt is 5.7 years at the current period end and the Group's LTV ratio is 31% as at 30 April 2019.

This LTV and interest cover ratio of 8.7x for the rolling twelve month period ended 30 April 2019 provide us with significant headroom compared to our banking covenants. We have £83m of undrawn bank facilities at 30 April 2019.

Taking into account the improvements we have made in the performance of the business and the reduction in underlying finance charges of c.£10m per annum over the last five years, the Group is now capable of generating free cash after dividends sufficient to fund the building of two to four new stores per annum, depending on location and availability of land.

The Group evaluates development and acquisition opportunities in a careful and disciplined manner against rigorous investment criteria. Our investment policy requires certain Board approved hurdle rates to be considered achievable prior to progressing an investment opportunity. In addition, the Group aims to maintain a Group LTV ratio of between 30% and 40% for the foreseeable future.

Portfolio Management

Our approach to store development and acquisitions in the UK and Paris continues to be pragmatic, flexible and focused on the return on capital.

Our property teams in both the UK and Paris continue to seek investment opportunities in new sites to add to the store pipeline. However, investments will only be made if they comply with our disciplined and strict investment criteria. Our preference is to acquire sites that are capable of being fully operational within 18- 24 months from completion.

Since 2016, the Group has opened nine new stores. Chiswick, Wandsworth, Mitcham, Paddington Marble Arch (all in London), Birmingham and Altrincham in the UK and Emerainville, Combs-la-Ville and Poissy in Paris. We have also completed the extensions and refurbishments of our Acton and Longpont (Paris) stores. All of these stores are performing in line with or ahead of their business plans.

New Stores

In January 2019, we completed the acquisition of a freehold former retail building in Peterborough. The site is one mile east of the City Centre. Subject to planning permission, we will convert the existing building into a 42,000 sq ft self-storage facility and currently estimate that the store will open in the final calendar quarter of 2019.

In October 2017, we completed the freehold acquisition of a 1.34 acre industrial site at Merry Hill. The site is about ten miles west of the centre of Birmingham, in a very prominent location close to Merry Hill regional shopping centre. We subsequently received planning consent and have commenced construction. We expect to open this new purpose-built 55,000 sq ft store towards the end of 2019.

In the second half of 2018, we obtained planning for and completed the acquisition of a site in Carshalton in South London. Construction is underway and we anticipate opening this 40,000 sq ft store at the end of 2019.

In Paris, where regulatory barriers are likely to continue to restrict meaningful new development inside the city, we will continue our policy of segmenting our demand and encouraging the customers who wish to reduce their storage costs to utilise our second belt stores. We will also manage occupancy and rates upwards in the more central stores and ensure that pricing recognises the value customers place on the convenience of physical proximity. The strong selling organisation and store network established by Une Pièce en Plus in Paris uniquely enables it to implement this commercial policy to complement the strong second belt markets in which we operate.

In June 2018, we exchanged contracts on a freehold 4.2 acre site in Pontoise, North West of Paris and have now received planning permission and completed the acquisition of the site in December 2018. We anticipate converting the existing building into a 65,000 sq ft store and that opening will be in the second half of 2019.

In April 2018, we agreed a lease on a site at Magenta in central Paris. Subject to planning, we aim to open a 50,000 sq ft store here in the 2019/20 financial year.

We believe there will be further opportunities to develop new stores in the outer suburbs of Paris and are actively reviewing the market for new opportunities.

Lease Extensions and Assignments

As part of our ongoing asset management programme, we extended the leases on our Edinburgh Gyle, Edinburgh Fort Kinnaird and Portsmouth Fratton stores in the period.

At Edinburgh Gyle we extended the lease by ten years and secured a six-month rent-free period. The lease now has 17 years remaining and expires in 2036.

At Portsmouth Fratton, we extended the lease to 2042 and agreed a 12-month rent-free period as part of the negotiations.

At Edinburgh Fort Kinnaird, we exercised an existing option to extend the lease by ten years to 2030.

We have now extended the leases on 21 stores or 58% of our leased store portfolio in the UK since 2012 and our average lease length remaining now stands at 12.6 years as compared to 12.5 years at FY2018.

As announced in our 2018 Results, we closed our Merton store in July 2018 and consolidated the majority of customers into our new Mitcham site. We have now assigned the leases on the Merton store to a third party.

Existing Store Extensions and Refurbishments

In the UK we plan to redevelop a small number of our older stores. Currently, our Leeds Central store is closed as part of this programme and most of the store's customers have been relocated, mainly to our other two Leeds stores. We are also considering options for our Sheldon store, as anticipated on acquisition of the Alligator portfolio.

Our Newcastle store is midway through a full refurbishment and remains open during the course of the works. This refurbishment will conclude in December 2019.

During the period, we also received planning permission to extend both our Bedford and Barking stores.

Bedford has an existing MLA of 35,300 sq ft and occupancy peaked at 94% in 2018. We have now started construction of the additional storage building on land already in our ownership adjacent to the existing store. This will provide additional MLA of 24,900 sq ft which we expect to open in early 2020.

Barking currently has an MLA of 48,000 sq ft and its occupancy also peaked at 94% in 2018. The extension, which should be completed early 2020, will add another 4,400 sq ft. Both stores will remain open during the construction.

We continue to look at opportunities to add additional MLA to existing stores as we seek opportunities to enhance our return on invested capital.

Portfolio Summary

The self-storage market has been growing consistently for over 20 years across many European countries but few regions offer the unique characteristic of London and Paris, both of which consist of large, wealthy and densely populated markets. In the London region, the population is 13 million inhabitants with a density of 5,200 inhabitants per square mile in the region, 11,000 per square mile in central London and up to 32,000 per square mile in the densest boroughs.

The population of the Paris urban area is 10.7 million inhabitants with a density of 9,300 inhabitants per square mile in the urban area but 54,000 per square mile in the City of Paris and first belt, where 69% of our French stores are located and which has one of the highest population densities in the western world. 85% of the Paris region population live in central parts of the city versus the rest of the urban area, which compares with 60% in the London region. There are currently c.245 storage centres within the M25 as compared to only c.90 in the Paris urban area.

In addition, barriers to entry in these two important city markets are high, due to land values and limited availability of sites as well as planning regulation. This is the case for Paris and its first belt in particular, which inhibits new development possibilities.

Our combined operations in London and Paris, with 71 stores, contribute £42.4m of revenue and £28.9m of store EBITDA in the first half of the financial year and offer a unique exposure to the two most attractive European self-storage markets.

We have a strong position in both the UK and Paris markets operating 119 stores in the UK, 67 of which are in London and the South East, and 27 stores in Paris.

In the UK, 63% of our revenue is generated by our stores in London and the South East. On average, our stores in London and the South East are smaller than in the rest of the UK but the rental rates achieved are materially higher enabling these stores to typically achieve similar or better margins than the larger stores. In London we operate 44 stores within the M25, more than any other competitor.

In France, we have a leading position in the heart of the affluent City of Paris market with eight stores branded as Une Pièce en Plus ("UPP") ("A spare room") with more than twice the number of stores of our two major competitors combined. 69% of the UPP stores are located in a cluster within a five-mile radius of the city centre, which facilitates strong operational and marketing synergies as well as options to differentiate and channel customers to the right store subject to their preference for convenience or price affordability. The Parisian market has attractive socio-demographic characteristics for self-storage and we believe that UPP enjoys unique strategic strength in such an attractive market.

Together, as at 30 April 2019 London, the South East and Paris represent 64% of our stores, 72% of our revenues, as well as 56% of our available capacity.

In addition, Safestore has the benefit of a leading national presence in the UK regions where the stores are predominantly located in the centre of key metropolitan areas such as Birmingham, Manchester, Liverpool, Bristol, Glasgow and Edinburgh.

Market

The self-storage market in the UK and France remains relatively immature compared to geographies such as the USA and Australia. The Self-Storage Association ("SSA") Annual Survey (May 2019) confirmed that self-storage capacity stands at 0.68 square feet per head of population in the UK and 0.19 square feet per capita in France. Whilst the Paris market density is greater than France, we estimate it to be significantly lower than the UK at around 0.36 square feet per inhabitant. This compares with 9.4 square feet per inhabitant in the USA and 1.8 square feet in Australia. In the UK, in order to reach the US density of supply would require the addition of around another 17,000 stores as compared to c.1,200 currently. In the Paris region, it would require around 1,800 new facilities versus c.95 currently opened.

While capacity increased significantly between 2007 and 2010 with respondents to the survey opening an average of 32 stores per annum, new additions were limited to an average of 19 stores per annum between 2011 and 2016 (including container storage openings).

The volume of new store openings increased in 2017 and 2018. In 2018, the SSA reported 70 stores as having been opened across the industry in 2017. However, our own analysis of these openings shows that many were container-based operators and only c.30 of the sites represent self-storage sites that are comparable with Safestore's own portfolio. In the 2019 SSA Survey, it is estimated that c. 40 traditional self-storage stores were opened in 2018 (excluding container storage) with less than half competing directly with Safestore.

The 40 comparable sites represent around 3.4% of the traditional self-storage industry in the UK. These figures represent gross openings and do not take into account storage facilities closing or being converted for alternative uses.

The SSA 2019 Survey also reported that operators remain relatively cautious in terms of new store openings and site acquisitions and have revised their estimates down from last year. For 2019, operators are estimating the completion of around 40 developments (last year estimate for 2019 was 47 stores) and around 37 in 2020 (last year estimate was 42 stores). Traditionally, operators have opened or acquired far fewer stores than originally estimated. Based on these estimates, and adjusting for historical inaccuracy, we estimate that around 25-30 stores per annum will be developed over the coming years.

New supply in London and Paris is likely to continue to be limited in the short and medium term as a result of planning restrictions and the availability of suitable land.

The supply in the UK market, according to the SSA survey, remains relatively fragmented despite a number of acquisitions in the sector in the last three years. Safestore is the leader by number of stores with 119 wholly owned sites followed by Big Yellow with 75 wholly owned stores, Access with 57 stores, Lok'n Store with 31 stores, Shurgard with 31 stores and Storage King with 26 stores. In aggregate, the top ten leading operators account for 27% of the UK store portfolio. The remaining c.1,160 self-storage outlets (including 381 container-based operations) are independently owned in small chains or single units. In total there are 765 storage businesses operating in the UK.

Safestore's French Business, UPP, is mainly present in the core wealthier and more densely populated inner Paris and first belt areas, whereas our two main competitors, Shurgard and Homebox, have a greater presence in the outskirts and second belt of Paris.

Consumer awareness of self-storage is increasing but remains relatively low, providing an opportunity for future industry growth. The SSA survey indicated that 52% (54% in 2018) of consumers either knew nothing about the service offered by self-storage operators or had not heard of self-storage at all. Over the last 6 years this statistic has only fallen 12 percentage points from 64%. Therefore, the opportunity to grow awareness, combined with limited new industry supply makes for an attractive industry backdrop.

Self-storage is a brand-blind product. 57% of respondents were unable to name a self-storage business in their local area (2018: 61%). The lack of relevance of brand in the process of purchasing a self-storage product emphasises the need for operators to have a strong online presence. This requirement for a strong online presence was also reiterated by the SSA survey where 72% of those surveyed (67% in 2014) confirmed that an internet search would be their chosen means of finding a self-storage unit to contact, whilst knowledge of a physical location of a store as reason for enquiry was only c.26% of respondents (c.25% in 2014).

There are numerous drivers of self-storage growth. Most private and business customers need storage either temporarily or permanently for different reasons at any point in the economic cycle, resulting in a market depth that is, in our view, the reason for its exceptional resilience. The growth of the market is driven both by the fluctuation of economic conditions, which has an impact on the mix of demand, and by growing awareness of the product.

Safestore's domestic customers' need for storage is often driven by life events such as births, marriages, bereavements, divorces or by the housing market including house moves and developments and moves between rental properties. Safestore has estimated that UK owner-occupied housing transactions drive around 10-15% of the Group's new lets.

The Group's business customer base includes a range of businesses from start-up online retailers through to multi-national corporates utilising our national coverage to store in multiple locations while maintaining flexibility in their cost base.

Safestore's customer base is resilient and diverse and consists of around 64,000 domestic, business and National Accounts customers across London, Paris and the UK regions.

Business Model

Safestore's business model remains unchanged.

The Group operates in a market with relatively low consumer awareness. It is anticipated that this will increase over time as the industry matures. To date, despite the financial crisis in 2007/08 and the implementation of VAT on self-storage in 2012, the industry has been exceptionally resilient. In the context of uncertain economic conditions as the UK approaches Brexit, the industry remains well positioned with limited new supply coming into the self-storage market.

With more stores inside London's M25 than any other operator and a strong position in central Paris, Safestore has leading positions in the two most important and demographically favourable markets in Europe. In addition, our regional presence in the UK is unsurpassed and contributes to the success of our industry leading National Accounts business. In the UK, Safestore is the leading operator by number of wholly owned stores. With 75% of customers travelling for less than 20 minutes to their storage facility (2019 SSA Survey) Safestore's national store footprint represents a competitive advantage.

The Group's capital-efficient portfolio of 146 wholly owned stores in the UK and Paris consists of a mix of freehold and leasehold stores. In order to grow the business and secure the best locations for our facilities we have maintained a flexible approach to leasehold and freehold developments.

Currently, around 30% of our stores in the UK are leaseholds with an average remaining lease length at 30 April 2019 of 12.6 years (FY2018: 12.5 years). Although our property valuation for leaseholds is conservatively based on future cash flows until the next contractual lease renewal date, Safestore has a demonstrable track record of successfully re-gearing leases several years before renewal whilst at the same time achieving concessions from landlords.

In England, we benefit from the Landlord and Tenant Act that protects our rights for renewal except in case of redevelopment. The vast majority of our leasehold stores have building characteristics or locations in retail parks that make current usage either the optimal and best use of the property or the only one authorised by planning. We observe that our Landlords, who are property investors, value the quality of Safestore as a tenant and typically prefer to extend the length of the leases that they have in their portfolio, enabling Safestore to maintain favourable terms.

In Paris, where 41% of stores are leaseholds, our leases typically benefit from the well-enshrined Commercial Lease statute that provides that tenants own the commercial property of the premises and that they are entitled to renew their lease at a rent that is indexed to the National Construction Index published by the state. Taking into account this context, the valuer values the French leaseholds based on an indefinite property tenure, similar to freeholds but at a significantly higher exit cap rate.

Our experience is that being flexible in its approach has enabled Safestore to operate from properties and in markets that would have been otherwise unavailable and to generate strong returns on capital invested.

Safestore excels in the generation of customer enquiries which are received through a variety of channels including the internet, telephone and 'walk-ins'. In the early days of the industry, local directories and store visibility were key drivers of enquiries. However, the internet is now by far the dominant channel, accounting for 82% (2018: 83%) of our enquiries in the UK and 74% (2018: 74%) in France. Telephone enquiries comprise 11% of the total (16% in France) and 'walk-ins' amount to only 7% (10% in France). This dynamic is a clear benefit to the leading national operators that possess the budget and the management skills necessary to generate a commanding presence in the major search engines. Safestore has developed a leading digital marketing platform that has generated 18% enquiry growth over the last five years (excluding Alligator). Towards the end of 2015, the Group launched a new dynamic and mobile-friendly UK website, which has achieved its aim of providing the customer with an even clearer, more efficient experience. A similar website was launched in our Paris business at the end of 2016.

Although mostly generated online, our enquiries are predominantly handled directly by the stores and, in the UK, we have a Customer Support Centre ("CSC") which now handles 14% of all enquiries, in particular when the store staff are busy handling calls or outside of normal store opening hours.

Our pricing platform provides the store and CSC staff with system-generated real time prices managed by our centrally based yield management team. Local staff have certain levels of discretion to flex the system-generated prices but this is continually monitored.

Customer service standards are high and customer satisfaction feedback is consistently very positive. Over the last twelve months, we have achieved over 95% customer satisfaction, based on 'excellent' or 'good' ratings as collected by Feefo via our customer website.

The key drivers of sales success are the capacity to generate enquiries in a digital world, the capacity to provide storage locations that are conveniently located close to the customers' requirements and the ability to maintain a consistently high quality, motivated retail team that is able to secure customer sales at an appropriate storage rate, all of which can be better provided by larger, more efficient organisations.

We remain focused on business as well as domestic customers. Our national network means that we are uniquely placed to further grow the business customer market and in particular National Accounts. Business customers in the UK now constitute 47% of our total space let and have an average length of stay of 31 months. Within our business customer category, our National Accounts business represents around 436k sq ft of occupied space (around 12% of the UK's occupancy). Approximately two-thirds of the space occupied by National Accounts customers is outside London, demonstrating the importance and quality of our well invested national estate.

The business now has in excess of 64,000 business and domestic customers with an average length of stay of 31 months and 22 months respectively.

The cost base of the business is relatively fixed. Each store typically employs three staff. Our Group Head Office comprises business support functions such as Yield Management, Property, Marketing, HR, IT and Finance.

Since the completion of the rebalancing of our capital structure in early 2014, the subsequent amendment and extension of our banking facilities in summer 2015 and the refinancing of all facilities in May 2017, Safestore has secure financing, a strong balance sheet and significant covenant headroom. This provides the Group with financial flexibility and the ability to grow organically and via carefully selected new development or acquisition opportunities.

At 30 April 2019 we had 1.44m sq ft of unoccupied space in the UK and 0.28m sq ft in France, equivalent to c.40 full new stores. Our main focus is on filling the spare capacity in our stores at optimally yield-managed rates. The operational leverage of our business model will ensure that the bulk of the incremental revenue converts to profit given the relatively fixed nature of our cost base.

Trading Performance

UK - continued solid performance

Revenue in the UK has grown by 5.3% in the period, whilst, on a like-for-like basis, revenue grew by 5.6%. Performance was strong across all of the UK with London and the South East up 4.7% and regional UK up 7.4%. Like-for-like average occupancy grew by 2.8% in the period and like-for-like closing occupancy increased by 1.6ppts to 72.6% (2018: 71.0%). Given the usual cyclicality of the industry, we saw an outflow of occupancy of 53,000 sq ft in the period (2018: 3,000 sq ft) reflecting a particularly strong performance in the previous year.

Our occupancy performance was complemented by an improvement in the like-for-like average rate of 2.6% for the period, continuing the momentum seen over the last three quarters.

Our total closing occupancy was up 1.6ppts at 72.6% (2018: 71.0%). Total occupancy is lower than like-for-like occupancy due to the impact of recently opened stores. Total rate grew by 2.4% to £24.23 (2018: £23.66).

We remain focused on our cost base. During the period, our cost base increased by 4.7% or £1.1m on a like-for-like basis largely driven by the variable costs related to incremental revenue and planned maintenance expenditure incurred earlier in the year. Excluding the maintenance expenditure, costs grew by 2.6%. Total costs increased by £1.2m reflecting recently opened stores.

As a result, EBITDA for the UK business was £27.0m (2018: £25.2m), an increase of £1.8m or 7.1%.

Paris - another year of strong growth

Our Paris business had a strong first half of the year growing like-for-like revenue by 6.3%. Our like-for-like average occupancy for the period was 8.0% ahead of 2018 and the like-for-like closing occupancy ended the half-year up 4.7ppts at 81.7% (2018: 77.0%). The occupancy performance was partially offset by a 0.8% reduction in the like-for-like average rate in the period.

Excluding our lower price suburban Emerainville and Combs-la-Ville stores, which opened in September 2016 and June 2017 respectively, from the like-for-like portfolio, the average rate was up 1.1% throughout the period.

Total revenue was up 7.9% in the period. We opened a new store at Poissy in the summer of 2018 and its lower occupancy levels mean that our total occupancy was 77.7%, up 0.7 ppts on the first half of 2018. All our recently opened stores at Emerainville (2016) and Combs-la-Ville (2017) and Poissy (2018) are trading in line with or ahead of our initial expectations.

The impact of Sterling being 0.8% stronger than in the comparative period resulted in Sterling equivalent revenue growing by 6.5% for the period.

We continue to pursue our proven strategy of growing the revenue of our market leading Parisian portfolio by flexing the balance of rate and occupancy growth and we are now in the twenty-first year of uninterrupted revenue growth in local currency.

The like-for-like cost base in Paris remained well controlled during the year and grew by 2.9% or €0.2m. As a result, like-for-like EBITDA grew to €13.1m (2018: €12.1m), an improvement of €1.0m or 8.3% on 2018.

Frederic Vecchioli

17 June 2019

Financial Review

Underlying Income Statement

The table below sets out the Group's underlying results of operations for the six months ended 30 April 2019 and the six months ended 30 April 2018.

Notes:

1. Adjusted Diluted EPRA EPS is defined in note 2 to the financial statements.

2. Adjusted EPRA earnings excludes share-based payment charges and, accordingly, the underlying EBITDA, underlying EBITDA after leasehold rent and underlying profit before tax measures have been restated to exclude share-based payment charges for consistency.

Management considers the above presentation of earnings to be representative of the underlying performance of the business.

Underlying EBITDA increased by 5.9% to £41.4m (H1 2018: £39.1m) reflecting a 5.6% increase in revenue offset by a 5.3% increase in the underlying cost base (see below). The leasehold rent charge has decreased by 1.9% from £5.4m in H1 2018 to £5.3m, reflecting favourable rent settlements in the UK in the year to date.

Finance charges increased by 5.0% from £4.0m in H1 2018 to £4.2m in H1 2019. This principally reflects an increase in borrowings to finance acquisition and construction works for our development sites.

Given the Group's REIT status in the UK, tax is normally only payable in France. The current tax charge for the period increased by 9.5% to £2.3m (H1 2018: £2.1m).

As explained in note 2 to the financial statements, management considers that the most representative earnings per share ("EPS") measure is Adjusted Diluted EPRA EPS which has increased by 7.1% to 13.5 pence (H1 2018: 12.6 pence).

Reconciliation of Underlying EBITDA

The table below reconciles the operating profit included in the consolidated income statement to underlying EBITDA.

The main reconciling item between operating profit and underlying EBITDA is the gain on investment properties, which was £7.9m in H1 2019 (H1 2018: £51.8m). The Group's approach to the valuation of its investment property portfolio at 30 April 2019 is discussed below.

Underlying Profit by Geographical Region

The Group is organised and managed in two operating segments based on geographical region. The table below details the underlying profitability of each region.

Note: CER is Constant Exchange Rates (Euro denominated results for the current period have been retranslated at the exchange rate effective for the comparative period in order to present the reported results on a more comparable basis).

Underlying EBITDA in the UK increased by £1.6m, or 5.6%, to £30.0m (H1 2018: £28.4m), reflecting a 5.3% increase in revenue offset partially by 5.0% increase in the underlying cost base largely reflecting an acceleration in our planned maintenance program that is not expected to repeat in the second half the year. Underlying UK EBITDA after leasehold rent increased by 7.1% to £27.0m (H1 2018: £25.2m) with the margin increasing to 48.9% from 48.1% in H1 2018. On a like-for-like basis underlying EBITDA margin after leasehold costs increased to 49.8% (H1 2018: 48.7%).

In Paris, underlying EBITDA increased by €1.0m, or 8.3%, to €13.1m (H1 2018: €12.1m), reflecting a €1.5m increase in revenue, arising from a 9.1% increase in average occupancy partly offset by a 1.4% decrease in the average storage rate. The EBITDA after leasehold costs margin in Paris grew from 50.5% in H1 2018 to 51.2% in H1 2019, reflecting the improving profitability of the newly opened Paris stores. On a like-for-like basis the EBITDA after leasehold costs margin increased to 52.0% (H1 2018: 50.5%). Underlying EBITDA after leasehold rent in Paris increased by 9.4% to €10.5m (H1 2018: €9.6m).

The combined results of the UK and Paris delivered a 7.4% increase in underlying EBITDA after leasehold rent at constant exchange rates at Group level. Adjusting for an unfavourable exchange impact of £0.1m in the current year, Group reported underlying EBITDA after leasehold rent has increased by 7.1% or £2.4m to £36.1m (H1 2018: £33.7m).

Revenue

Revenue for the Group is primarily derived from the rental of self-storage space and the sale of ancillary products such as insurance and merchandise (e.g. packing materials and padlocks) in both the UK and Paris.

The split of the Group's revenues by geographical segment is set out below for H1 2019 and H1 2018.

The Group's reported revenue increased by 5.6% or £3.9m during the period. The Group's occupied space was 150,000 sq ft higher at 30 April 2019 (4.65 million sq ft) than at 30 April 2018 (4.50 million sq ft). Average occupancy during the period was 3.8% higher at 4.61 million sq ft (H1 2018: 4.44 million sq ft), and the reported average rental rate for the Group for the period was 1.5% higher at £26.30 than in H1 2018 (£25.91).

On a like-for-like basis, adjusting for the impact of new and closed stores, the Group's revenue has increased by 5.6% since H1 2018. Adjusting for an unfavourable exchange impact in the current year, revenue increased by 5.9% on a constant currency basis.

In the UK, reported revenue increased by £2.8m or 5.3%. Closing occupancy increased by 2.2% to 3.68 million sq ft at 30 April 2019 (H1 2018: 3.60 million sq ft) and the average rental rate increased by 2.4% to £24.23 (H1 2018: £23.66). The average space occupied during the period was up 2.5% compared with H1 2018 at 3.65 million sq ft (H1 2018: 3.56 million sq ft).

On a like-for-like basis, adjusting for new and closed stores, UK revenue increased by £2.9m or 5.6% arising from a 2.8% increase in average occupancy and a 2.6% increase in the average store rate.

In Paris, revenue increased by €1.5m or 7.9%. The average Euro exchange rate for H1 2019 was €1.142:£1 compared with €1.133:£1 in H1 2018 resulting in a negative impact on revenue of £0.2m and growth of 6.5% to £17.9m (H1 2018: £16.8m). Adjusting for the impact of new stores in Paris, like-for-like revenue increased by €1.2m or 6.3%.

Paris closing occupancy at 30 April 2019 has increased by 7.8% compared to 30 April 2018 to 0.97 million sq ft and average occupancy for the period of 0.96 million sq ft is a 9.1% increase compared to H1 2018. The average rental rate in Paris was €39.01 for the period, a decrease of 1.4% on H1 2018 (€39.58) largely reflective of the dilutive impact of our newer suburban stores at Emerainville and Combs-La-Ville. Adjusting to remove this impact, LFL average rate excluding these two stores increased by 1.1% to €41.11 (H1 2018: €40.68).

Analysis of Cost Base

Cost of Sales

The table below details the key movements in cost of sales between H1 2018 and H1 2019.

In order to arrive at underlying cost of sales, adjustments are made to remove the impact of depreciation and contingent rent.

Adjusting for the impact of new and closed stores, underlying cost of sales increased by 4.6% or £1.1m, to £25.1m (H1 2018: £24.0m) on a constant currency basis, principally due to a £0.5m increase in spending on store maintenance and facilities in a planned programme that will see costs disproportionately fall into the first half of the year.

The cost of sales attributable to new and acquired sites at Mitcham, Paddington Marble Arch in London and Poissy in Paris is £0.6m. Reported underlying cost of sales increased by £1.3m or 5.3% to £25.7m in H1 2019.

Administrative Expenses

The table below reconciles reported administrative expenses to underlying administrative expenses and details the key movements in underlying administrative expenses between H1 2018 and H1 2019.

In order to arrive at underlying administrative expenses, adjustments are made to remove the impact of exceptional items, corporate transaction costs and changes in the fair value of derivatives.

Underlying administrative expenses increased by 5.3% or £0.3m to £6.0m (H1 2018: £5.7m). The increase arose from a £0.1m favourable currency impact offset by increased employee remuneration (£0.2m), increases in professional services and administrative costs (£0.1m) and administration costs relating to our closed stores (£0.1m).

Investment Properties

A full external valuation of the store portfolio is undertaken by the Group on an annual, rather than a bi-annual, basis. At 30 April 2019, a sample of the Group's largest properties, representing approximately 36% of the value of the Group's investment property portfolio at 31 October 2018, has been valued by the Group's external valuers, Cushman & Wakefield Debenham Tie Leung Limited ("C&W"). In addition, at the same date, the Directors have prepared estimates of fair values for the remaining 64% of the Group's investment property portfolio, updating 31 October 2018 valuations to incorporate latest assumptions for estimated absorption, revenue growth and capitalisation rates to reflect current market conditions and trading.

As a result of this exercise, the net gain or loss on investment properties during the period was as follows.

The movement on investment properties reflects the increased value of the Group's store portfolio as a result of the continuing strong trading performance. The UK business contributed £3.0m of the £10.6m net revaluation gain (including investment properties under construction), with £7.6m arising in Paris. The valuation gain has arisen due to improving trading cash flow forecasts driven by a combination of storage rate and occupancy growth.

Operating Profit

Reported operating profit decreased by £41.4m from £87.3m in H1 2018 to £45.9m in H1 2019, primarily reflecting the decrease in the gain on investment properties offset by a £2.3m improvement in underlying EBITDA.

Net Finance Costs

Net finance costs includes interest payable, interest on obligations under finance leases, fair value movements on derivatives, exchange gains or losses, unwinding of discounts and exceptional refinancing costs. Net finance costs increased by £2.3m to £7.7m in H1 2019 (H1 2018: £5.4m). The main driver of the increase was the loss on fair value movement on derivatives of £1.2m (2018: gain of £0.8m).

Underlying Finance Charge

The underlying finance charge (net bank interest payable) increased to £4.2m, from £4.0m in H1 2018. The increase reflects interest arising from net borrowings in the year to fund acquisition and construction works on development sites. Net bank interest payable also includes the amortisation of debt issue costs of £0.1m as at 30 April 2019 (H1 2018: £0.1m).

Based on the drawn debt position as at 30 April 2019, the effective interest rate is analysed as follows.

As at 30 April 2019, £190m of the £250m UK revolver and €43m (£37.1m) of the €70m Euro revolver were drawn. The drawn amounts attract a bank margin of 1.25%, and the Group pays a non-utilisation fee of 0.50% on the undrawn balances of £60m and €27m.

The Group has interest rate hedge agreements in place to June 2022, swapping LIBOR on £135m at a weighted average effective rate of 0.94% and EURIBOR on €30m at an effective rate of 0.16%.

The 2024 and 2027 US Private Placement Notes are denominated in Euros and attract fixed interest rates of 1.59% (on €50.9m) and 2.00% (on €74.1m) respectively. The Euro denominated borrowings provide a natural hedge against the Group's investment in the Paris business.

The £50.5m 2029 US Private Placement Notes are denominated in Sterling and attract a fixed interest rate of 2.92%.

83% of the Group's drawn debt is effectively at fixed rates of interest, as a result of the hedging arrangements and fixed interest loan notes. Overall, the Group has an effective interest rate on its borrowings of 2.25% at 30 April 2019, compared to 2.28% at the previous year end, as a result of increased weighting of bank borrowing in the overall mix of debt.

Non-Underlying Finance Charge

Interest on finance leases was £2.3m (H1 2018: £2.3m) and reflects part of the leasehold rental payment. The balance of the leasehold payment is charged through the gain or loss on investment properties line and contingent rent in the income statement. Overall, the leasehold rent charge decreased from £5.4m in H1 2018 to £5.3m in H1 2019, principally reflecting favourable rent settlements in the UK. A net loss of £1.2m was recognised on fair valuation of derivatives (H1 2018: net gain of £0.8m).

The Group undertakes net investment hedge accounting for its new Euro denominated loan notes, so the income statement is less exposed to fluctuations in the Euro exchange rate.

Tax

The tax credit for the period is analysed below.

Income tax in the period was a net charge of £3.8m (H1 2018: £2.6m net credit).

In the UK, the Group is a REIT, so the current tax charge relates to the Paris business. The current tax charge for the period amounted to £2.3m (H1 2018: £2.1m).

In France, the 2018 Finance Bill, which was adopted in December 2017, extended the reduction in the main income tax rate announced in the 2017 Finance Bill such that this will now reduce progressively from 33.33% to 25.0% by 2022. As a result, the net deferred tax charge in the prior year reflects an exceptional deferred tax credit of £5.6m (H1 2019: £nil) relating to these changes.

Profit after Tax

The profit after tax for the period was £34.4m, compared with £84.5m in H1 2018, a decrease of £50.1m which arose principally due to the lower gain on investment properties (contributing £43.9m of the decrease) and the higher net finance expense (contributing £2.3m of the decrease), both of which are explained above.

Basic EPS was 16.4 pence (H1 2018: 40.3 pence) and diluted EPS was 16.4 pence (H1 2018: 40.2 pence). As explained in note 2 to the financial statements, management considers adjusted diluted EPRA EPS to be more representative of the underlying EPS performance of the business.

Dividends

The Board has announced an interim dividend of 5.5 pence per share, an increase of 7.8% on the interim dividend paid last year of 5.1 pence. This will amount to a dividend payment of £11.6m (H1 2018: £10.7m). The dividend will be paid on 16 August 2019 to shareholders who are on the Company's register at the close of business on 12 July 2019. The ex-dividend date will be 11 July 2019. 100% (H1 2018: 50%) of the dividend will be paid as a property income dividend ("PID").

Property Valuation

As discussed above, a sample of the Group's largest properties, representing approximately 36% of the value of the Group's investment property, has been valued by the Group's external valuers and the Directors have prepared estimates of fair values for the remaining 64% of the Group's investment property portfolio.

The table above summarises the movement in the valuations of the Group's investment property portfolio excluding investment properties under construction.

The exchange rate at 30 April 2019 was €1.1598:£1 compared to €1.1246:£1 at 31 October 2018. This movement in the foreign exchange rate has resulted in a £9.2m adverse currency translation movement in the period. This affects net asset value ("NAV") but has no impact on the loan to value ("LTV") covenant as the assets in Paris are tested in Euro.

The Group's property portfolio valuation has increased by £10.3m from the valuation of £1,216.2m at 31 October 2018. This reflects the gain on valuation of £14.5m, which is explained above, plus additions of £5.0m relating to store refurbishments and fit out works, offset by £9.2m of foreign exchange movements on the translation of the Paris portfolio.

The value of the Company's pipeline of expansion stores of £12.2m as at 30 April 2019 includes the development sites at Birmingham Merry Hill, Peterborough and Carshalton in the UK and Pontoise in Paris.

Adjusted basic EPRA net assets per share is 406 pence, an increase of 1.0% since 31 October 2018.

Gearing and Capital Structure

As at 30 April 2019, the Group's borrowings comprised bank borrowing facilities, made up of a UK term loan and revolving facilities in the UK and France, as well as a US Private Placement.

Net debt (including finance leases and cash) stood at £425.7m at 30 April 2019, an increase of £10.2m during the period from £415.5m at 31 October 2018 that is principally due to increased net drawings for development property acquisition and construction costs. Total capital (net debt plus equity) increased from £1,204.1 at 31 October 2018 to £1,224.2m at 30 April 2019. The net impact is that the gearing ratio has remained unchanged at 35% in the period.

Management also measures gearing with reference to its loan to value ("LTV") ratio defined as gross debt (excluding finance leases, but adjusted for the fair value of the US dollar cross currency swaps) as a proportion of the valuation of investment properties and investment properties under construction (excluding finance leases). At 30 April 2019, the Group LTV ratio was 31% compared with 30% at 31 October 2018. The Board considers that the current level of gearing is appropriate for the business to enable the Group to increase returns on equity, maintain financial flexibility and to achieve our medium-term strategic objectives.

As at 30 April 2019, £190m of the £250m UK revolver and €43m (£37.1m) of the €70m Euro revolver were drawn. Including the US Private Placement debt of €125m (£107.8m) and £50.5m, the Group's borrowings totalled £385.4m (before adjustment for unamortised finance costs). As at 30 April 2019, the weighted average remaining term for the Group's committed borrowing facilities is 5.3 years.

Borrowings under the existing loan facilities are subject to certain financial covenants. The UK bank facilities and the US Private Placement share interest cover and LTV covenants. The interest cover requirement of EBITDA:interest is 2.4:1, where it will remain until the end of the facilities' terms. Interest cover for the rolling twelve month period to 30 April 2019 is 8.7x, calculated on the basis required under our financial covenants.

The LTV covenant is 60% in both the UK and France, where it will remain until the end of the facilities' terms. As at 30 April 2019, there is significant headroom in both the UK LTV and the French LTV covenant calculations. The Group is in compliance with its covenants at 30 April 2019 and, based on forecast projections, is expected to be in compliance for a period in excess of twelve months from the date of this report.

Cash Flow

The table below sets out the cash flow of the business in H1 2019 and H1 2018.

Note: Free cash flow is a non-GAAP measure, defined as cash flow before investing and financing activities but after leasehold rent payments.

Operating cash flow increased by £3.1m in the period, principally reflecting the £2.3m increase in underlying EBITDA, and a reduction in working capital outflows in the first half of the year.

Interest payments were £0.2m higher than the prior half year, principally as a result of increased net borrowings. Tax paid during the period decreased by £1.5m due to timing differences caused by the settlement of tax liabilities in the six months to 30 April 2018. As a result, free cash flow (before investing and financing activities) grew by £4.5m to £27.6m (H1 2018: £23.1m).

Investing activities experienced a net outflow of £17.8m (H1 2018: £70.0m) from capital expenditure relating to the new sites at Carshalton in London, Peterborough, Merry Hill in Birmingham and Pontoise in Paris. In H1 2018, the net cash outflow was largely attributed to the £55.9m (net of cash acquired) paid for the acquisition of Alligator. Of the £17.8m cash outflow on investment properties, £2.0m (H1 2018: £3.2m) was spent on capital maintenance and store fit-outs, with the balance principally spent on new stores and development of the existing portfolio.

Dividends paid to shareholders increased from £17.7m in H1 2018 to £20.4m in H1 2019, and the Group drew a net £19.0m of borrowings, primarily to finance capital expenditure.

Consolidated income statementfor the six months ended 30 April 2019